Also known as WHT and deduction of tax at source.
Withholding tax in a nutshell
Companies and partnerships with a corporate partner are required to withhold UK income tax at the basic rate (20%) when making certain UK sourced payments of interest and royalties.
The non-resident landlords regime changed from 6 April 2020 such that UK property sourced income is now subject to UK corporation tax rather than income tax. However, withholding tax (WHT) must still be deducted from payments made to the landlords, with credit available against the landlord’s corporation tax liability for the income tax suffered.
The tax withheld from the payment must accounted for and paid over to HMRC.
UK companies may also suffer overseas withholding tax on income received from outside the UK. In addition to interest and royalties, this can include dividend income.
How does WHT apply to interest?
UK WHT arises if the interest has a source in the UK, it is yearly interest and it is actually paid. What constitutes a UK source is determined by case law, depending upon the facts of the case and how the transactions are carried out. HMRC considers the residence of the debtor is the most important factor, along with the location of the assets held by the debtor, as these factors will determine where the debt is enforced.
Tax is deducted from payments of interest at the basic rate in force at the time the payment is made, unless the rate can be reduced under a double tax agreement (DTA) (see below).
How does WHT apply to royalties?
Income tax must be withheld on certain cross-border payments arising from intellectual property. This includes royalties and other sums paid in respect of the use of patents, qualifying annual payments and intellectual property payments made to a person who usually lives outside the UK. In practice, this covers any copyright, patent, trademark, design, trade secret, know-how and public lending rights in respect of books.
UK withholding tax is typically only due if the source of the royalty is in the UK, determined under the principles outlined above in respect of interest. However, UK withholding tax also applies to intellectual property payments that are attributable to a UK permanent establishment (PE) or an avoided PE, even if the royalty payment is not made from the UK.
How can the rate of WHT be minimised?
The amount of WHT to be deducted may be reduced, in some cases to 0%, under the terms of DTAs or European directives. This process is usually subject to a clearance procedure or the submission of a formal claim in order to receive the benefits available. Failure to obtain the relevant clearance before applying a reduced rate of UK withholding tax can result in interest being charged on the tax which should have been withheld.
Are there any exceptions from the requirement to withhold tax?
Companies (and other entities) are not required to deduct tax at source on types of interest that fall within any relevant exemption. Examples include interest paid on loans in place for less than 12 months, interest paid to another UK company or interest paid on a quoted Eurobond listed on a recognised stock exchange.
Similarly, intellectual property payments relating to the use of film or video recordings, income from the sale of software, certain franchise fees and proceeds from the outright sale of intellectual property rights are also excluded from the requirement to withhold tax.
What are the filing requirements for WHT?
Companies must account for income tax on a quarterly basis, using a CT61 quarterly return, based on the amounts paid and received in the quarter.
The quarter ends are based on the normal calendar year, i.e. 31 March, 30 June, 30 September and 31 December. However, if a company’s year end is different from any of these, the balance sheet date is deemed to be a quarter-end, so there will be five return periods. The due date for filing the return is 14 days after the end of the return period.
What about payments and repayments of WHT?
For each CT61 quarter the tax withheld from payments (i.e. tax to be paid over to HMRC) is compared with the tax suffered on receipts (ie tax which can be reclaimed from HMRC).
If the tax to be withheld in the return period exceeds the tax suffered in that period, the net amount is the amount the company must pay over to HMRC for that quarter, within 14 days after the end of the return period. If the tax suffered by the company in the return period exceeds the tax withheld in that period, the company may claim a refund from HMRC.
Where any income tax due under these provisions is not paid by the due date, interest is charged from the due date to the date when the tax is paid. Interest on repayments of income tax accrues from the day after the end of the accounting period in which the receipt giving rise to the repayment was received.